Weak growth, inflation delays Bank of Canada rate rise

OTTAWA (Reuters) - The Bank of Canada held its benchmark interest rate at 1 percent on Wednesday, but it revised its guidance dramatically to say that excess capacity in the economy, soft inflation and stabilizing household debt have combined to push any rate increase further away than previously thought.

Governor Mark Carney has been the most hawkish central banker in the Group of Seven (G7) major industrial economies for several months, but he has steadily been watering down his guidance on the need to start raising rates.

"While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 percent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated," the bank said.

In October and December it said: "Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target."

The Canadian dollar swiftly moved lower and bonds rose.

Carney, set to head the Bank of England in July, was the first in the G7 to raise rates following the global financial crisis. Refraining from further tightening since mid-2010, he began signaling in April the need to start raising rates, but has had to dampen expectations repeatedly.

"The Bank of Canada has made (policy) about as soft as they could, while still maintaining that tightening bias," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.